“SUBPRIME AND IMPACTS ON AFRICAN AMERICANS”

1. “SUBPRIME AND IMPACTS ON AFRICAN AMERICANS” Dr. Phillips

2. Today's Headlines • 12MM foreclosed homes by 2012 • 1 in 8 US homeowners with mortgages are in foreclosure or behind on mortgage payments • Percentage of US mortgages 90 days or more delinquent and in foreclosure hit an all time high during the 2nd quarter of ’09. • Mortgage delinquencies are rising sharply in high-income, predominantly white enclaves • Lending continues to fall • Blacks experienced the sharpest reversal in homeownership rates in recent years

3. Three Things – I will do today (B) Discuss the impact of the current and still unfolding crisis in the home finance market on African Americans (C) Offer a set of recommendations that can help African Americans and other minorities prevail in this crisis, and that can potentially help us increase home ownership over the long run. (A) Give an historical overview of homeownership and African Americans

4. HISTORICAL OVERVIEW "It struck me that our history is contained in the homes we live in, that we are shaped by the ability of these simple structures to resist being defiled." AchmatDangor Kafka's Curse Henry Cisneros, former HUD Secretary, states“The serious problems of housing discrimination and segregation…have now helped to lead us to our current financial crisis.” There  is a long history of unfair housing and lending practices in the United States.

5. Residential Segregation • Before the 1900s housing was segregated not by race but by economic conditions. • After this period, restrictive covenants were enacted that forbade whites from selling their property to blacks, or allowing blacks to otherwise occupy the home. • Although the Supreme Court ruled against this practice in 1948, it continued through the 1950s.

6. JIM CROW ERA

7. Urban Renewal

8. Effects of Urban Renewal “Without any past or current discrimination to prevent blacks from accumulating housing at the same rates as whites, the housing wealth of blacks would be $487 billion higher than it actually is” John Yinger, 2005. The Pruitt-Igoe project in St. Louis 

9. Lending Discrimination 1930-1940

10. 1940-1950 • During the ‘40s and ‘50s the federal government not only relied on the HOLC ratings when making VA and FHA lending decisions, but recommended the use of restrictive covenants that had been deemed to be unenforceable and contrary to public opinion in 1948. • By guaranteeing loans made by private parties, the FHA and VA transformed the residential housing market and allocated millions of dollars to the housing industry during the postwar era. • This provided momentum for the rapid suburbanization of the US after 1945 and contributed significantly to the decline of the inner city by encouraging the selective out-migration of middle-class whites to the suburbs while blatantly ignoring the lending needs of the black urban core (Massey, 2008).

11. 1940-1950

12. 1950-1960 • By the late ‘50s, many blacks turned to speculators. • White speculators bought property at low prices and would quickly resell the property to a black buyer who would then pay two to four times the original cost. • If black purchasers missed even one payment, the white property owner would evict the occupants and resell the property. • The black purchaser was not given title to the building until the entire debt had been paid (Satter, 2009).

13. Impact • The economic impact of this practice was enormous as blacks were routinely grossly overcharged by real estate agents and speculators, and none of the money invested in the property was recoverable. • This scenario is eerily similar to the recent subprime crisis, but the speculator has transformed into a “legitimate” financial institution.

14. 1960-1970

15. 1970-1990 • In 1975, HMDA was enacted • Not until a 1989 amendment to HMDA requiring banks to include in their annual filing the number of loan applications accepted/rejected by race that it became possible to uncover differences in lending patterns between whites and non whites (Phillips, 2003). • For every one rejection of a white loan application there were three rejected applications for blacks. More important, the difference in rejection rates could not be attributed to non-racial factors (Phillips & Scannell, 2003).

16. Predatory Lending • This pattern of discrimination in mortgage lending continued throughout the ‘90s • Due in part to technological advances, discrimination in lending continues with lenders providing credit on discriminatory terms—this is predatory lending All Subprime Loan Predatory All Predatory Loans Subprime

17. SUBPRIME CRISIS AND IMPACTS ON AFRICAN AMERICANS • In 1995, the top 25 subprime loan originators controlled 39.3% of the market; by 2003 the top 25 originators controlled 93.4% of the market • Originated roughly 80% of the subprime loans made • A larger percentage of total loans are made in predominately black census tracts than prime lenders • Barely 1 in 10 traditional commercial banks were in inner-city, minority neighborhoods • Five times more visible in black neighborhoods than in white neighborhoods

18. 52.4% of African American families hold subprime loans • Black middle class has been hit the hardest by the foreclosure crisis and are five times more likely to hold high-interest subprime mortgages than whites of similar or even lower incomes • At least 33 percent of the subprime mortgages originated went to borrowers with credit scores that should have qualified them for conventional prevailing-rate loans • 6 times more likely than a prime borrower to go into foreclosure within 2 years of origination • Default rates are 7 times those for prime borrowers

19. Economic Consequences • Individual • African Americans have not had the same opportunities as whites to own homes and build wealth. • Black homeowner pays 3% more than white homeowner, adding over $100,000 • Persistent lending discrimination has prevented minorities from gaining a financial footing so that they can qualify for low-cost loans. • Black homeowners frequently pay over 50% of income for housing

20. Neighborhood Impacts • At least a 1% decline in the value of homes in proximity to foreclosed properties. Some estimates are as high as 9.7% • For each 1% increase in neighborhood property-tax delinquencies, sales prices fall $778 per home • Costs to cities of resolving abandoned and foreclosed residential properties range to upwards of $40,000 per home

22. RECOMMENDATIONS • Vigorous enforcement of current housing laws: FHA and ECOA • Make it Easier for Private Plaintiffs to Prove Lending Discrimination • Support new legislative initiative • The Community Reinvestment Modernization Act of 2009 • The Mortgage Reform and Anti-Predatory Lending Act • Housing Fairness Act of 2009 • Home Ownership and Equity Protection Act (HOPEA) • Consumer Financial Protection Agency

23. Other Measures • Making Subprime Prices Comparable and Transparent • Making Prime Market More Accessible by Improving Automated Underwriting • Make homeowners whole • sue those responsible for fraudulent activities • Institute inclusionary zoning laws

24. CONCLUSION • The housing and related economic crises are inextricably linked to the pervasive forces of inequality and uneven investment of the past • It is important that policy makers focus on sustaining homeownership while providing housing that is affordable to all.